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Valuation Of Shares

Earning Capitalization
Method (ECM)
Dividend Capitalization
Method

Fair Value
Method
Fair Value = Intrinsic Value + ECM
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Calculation Of Value on Intrinsic Value Basis

Also Known as :

Intrinsic Value
Net Asset Value
Break up Value
Net Worth Per Share
Book Value Per Share

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Valuation of Intrinsic Value :


Sundry Assets
Less: Sundry Liability

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Add: Goodwill ( Revalued)


Add: Non Trade Investment
Less: Preference Share Capital and
Dividend in Arrear
Add: Notional Calls
Net Asset For ESH
Divided By No. of Shares

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Intrinsic Value
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Note: Goodwill will always be calculated for the purpose of


Intrinsic Value
Note: Sundry Asset and Liability are after :
Revaluation
Rectification
New Policy etc.
Note: Always Calculate Intrinsic Value on Ex Dividend
Basis.
Intrinsic Value =
Cum Dividend

Int. Value
+
Ex Dividend

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Div Per
Share
4

1.

Earning Yield Method /


Earning Capitalization Method / Yield Method

= Earning Rate
NRR

Paid Up Share Capital Per Share

Future Marketable Profit

Non Trade Inv.


Income Net of tax

Earning Rate =

x 100
Share Capital

Use : Where large no. of shares is to be valued ( Big Lots)


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2. Dividend Capitalization Method


Dividend Rate

Paid up share cap per share

Normal Rate of return

Dividend Rate is rate of Dividend Company is expected to


pay.
Normal Dividend Rate is NRR.
This method is applied for Small Lot of shares.
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3. Fair Value Method

Fair Value = Intrinsic Value + ECM


2
This method is to be used for valuation of
shares for controlling Interest.

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How to Calculate Normal Rate of Return


NRR of Industry is taken as Base
Add: Risk Factor % Assumed
( Risk Premium for each risk)
Ke of Companies
Risk Factors:
1. Dividend Track Record
2. Dividend Coverage Ratio
3. Asset Backing Ratio
4. Debt Equity / Capital
Gearing Ratio
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NRR

Equity Dividend Coverage Ratio =


PAT Preference Dividend with CDT
Equity Dividend

Preference Dividend Coverage Ratio =


PAT
Preference Dividend
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Asset Backing Ratio =


Intrinsic Value Per Share
Paid up value per Share
Capital Gearing Ration =
Debt + Preference Share Holder
Equity Losses Preference Share Holder
Debt Equity =
Debt
Equity
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4. Valuation of Business
It can be on the basis of:
1. Shares
2. Cash Flows
1.

Value as per Share =

Number of
Shares

Value of
Shares

Value per share can be : MP , Intrinsic Value , Fair Value , ECM , DCM

2.

Value of Business on Cash Flow Basis =


Cash flow of Business

Discount Factor

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